Trade Practice Reform and the TTB

Alex Koral | January 30, 2023

Just about a year ago, the Treasury Department published a report on competition in the beverage alcohol industry, which posited several ways to reform federal and state regulations to help create a more even playing field for smaller producers.

Among the many ideas proffered, changing how the Tax and Trade Bureau (TTB) approaches and policies trade practice rules in the industry was highlighted. And sure enough, the TTB is currently putting its money where its mouth is by undertaking a proposed rulemaking to determine how exactly it should adjust its trade practice rules.

Federal rulemaking can be a long and potentially fraught process, requiring the solicitation of public comments, lengthy review by agency lawyers and finally a (hopefully) reasoned publication of what the new rules will be. As part of that, the TTB actively encourages interested members of the industry and public to submit their thoughts and opinions on the subject (public comments are open until March 9, 2023).

Because rulemaking can be a confusing and drawn-out process, it may be helpful to reflect on what the TTB is specifically looking into to understand what might come from this current effort.

What does this proposed rulemaking address?

“Trade practice” is one of the harder-to-pin-down aspects of beverage alcohol regulation. Broadly, it refers to a set of laws that govern how industry members can interact, prohibiting certain practices that might undermine retailer independence or unfairly advantage some businesses over others. For anyone with an eye to dense legalese or with time on their hands, federal trade practice rules are set out in the Federal Alcohol Administration Act (FAAA, 27 U.S.C. 205).

The current rulemaking is not designed to rewrite U.S. code but is instead intended to restructure how the TTB interprets those broad laws and how it can apply them more specifically to the current alcohol market.

Trade practice laws involve the regulation of a select set of business activities, built around the goal of restricting any undue influence on the wholesaler and retailer tiers that might cause them to purchase from one supplier in exclusion, in part or in whole, to other suppliers. Each of these rules prohibit exclusion in different ways, from outright prohibiting it (Exclusive Outlet), to restricting cross-tier ownership and furnishing things of value (Tied House), to banning money in exchange for purchasing alcohol (Commercial Bribery), to disallowing conditional sales and promises for returns of unsold products (Consignment Sale).

In its rulemaking, the TTB recognizes that these trade practice laws were originally written in the 1930s, when the U.S. was moving out of the Prohibition Era. While the TTB has revised its trade practice regulations in the decades since the FAAA was first enacted, it has been quite a while since the last update.

As such, the rulemaking sets out three general questions the TTB wants to address: 1) how to modernize its trade practice regulations so they suit today’s beverage alcohol market; 2) how to authorize more standard business practices in ways that do not result in exclusion or threaten retailer independence; and 3) how to account for the digital marketplaces, where more and more often alcohol is being sold.

This may seem like a wildly expansive set of issues to address, potentially affecting all aspects of the beverage alcohol market. To help focus things, the TTB’s rulemaking sets out 16 specific areas of interest to address. These range from topics like category management and slotting fees, to private labels, to who can hold interest in retail shops, to third-party involvement in advertising and delivery of alcohol. The complete list of topics the TTB is seeking to address can be found on the Federal Register site, and interested parties are encouraged to provide their thoughts (either independently or perhaps through trade groups they may be members of).

What rules may come?

From the comments that have come in so far, it seems likely there will be a lot of disappointment among the public when the TTB issues its final rules—driven, perhaps, by misunderstandings about the scope of the rulemaking.

Indeed, several of the comments call on the TTB to make rule changes that are completely out of its control, such as establishing nationwide self-distribution rights for producers or outright eliminating the three-tier system. As worthy (or not) as some of these proposals may be, many of them would be better addressed to state legislatures, which govern things like from whom retailers can buy and what parties can participate in direct-to-consumer shipping of alcohol.

Instead, the TTB’s rulemaking will necessarily be directed at aspects of the alcohol industry that the federal government has jurisdiction over, namely how suppliers and wholesalers operate and interact with members of the other tiers, but not more mundane issues like when, where and how a consumer can buy a bottle of wine or gin.

That said, the rulemaking’s primary goal is to foster greater competition in the market, especially by making it easier for smaller craft producers to gain a foothold and have the chance to grow. Trade practice reform is central to that effort, not only because that is an area the federal government has explicit jurisdiction over, but because the original intent of creating rules around trade practice was to minimize undue influence and market capture by the big players.

By prohibiting exclusive dealings and limiting giant corporations from engaging in practices that are common in other industries (look at how Cheerios are placed on any given cereal aisle, as opposed to generic-o’s, for an example of monopolistic category management and shelving practices), trade practice laws have always aimed to create a more even playing field.

The FAAA was drafted nearly 90 years ago, for a beverage alcohol market that is very different than what exists today. This update, then, is a welcome opportunity to make trade practice regulations work for the modern market and to help build out a better future for alcohol businesses of all sizes.

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